Why the average American was hit hard by Covid

The Covid-19 crisis has revealed a harsh truth about the most powerful nation in the world. The country as a whole is rich, but the average citizen is in dire financial straits. TV interviews of hundreds of Americans show a common theme: Most do not have sufficient funds to cover their next rent, mortgage payment, or utility bill.

The big shocker is the way Americans are lining up for food. One video near Pittsburgh showed people sitting in their plush cars and trucks in a mile-long bumper-to-bumper line, occupying both lanes, inching their way forward to a charity organisation’s food distribution stations. The same scene plays itself out all over the country.

The US Congress and the Fed have pumped in a whopping $6 trillion — nearly a quarter of the country’s GDP — in the largest economic bailout in history. Sectors as varied as hospitals, higher education, the airlines and transportation systems, have received nearly $3 trillion in aid. Married taxpayers making up to $1,50,000 in annual income are expected to receive $2,400 per household in a one-time direct cash transfer. The nearly 26 million unemployed will each receive paycheck assistance of about $1,000 a week for 39 weeks. Even gig-economy workers — such as independent contractors and Uber drivers — will receive money.

But as these transfers slowly work their way through a complex system of government agencies and financial institutions, the average American citizen is struggling. Raised in a culture that fiercely celebrates individuality, people who have long since left their homes to live on their own are forced to return to stay with their parents.

The Fed has consistently issued warnings that the American savings rate is woefully inadequate. Survey after survey, the Fed has said that a majority of families have no more than $400 saved to pay for emergency expenses. To raise anything more, families dip into their credit cards and go further into debt.

Americans are simply addicted to borrowing. According to Debt.org, the US had a median household income of $61,372 in 2017, but the typical American household carries an average debt of $1,37,063. The whole system is set up to encourage borrowing and aggressively consume.

An individual younger than 18, staying at home with parents, has no debt. Upon entering college, he signs up for an education loan. Graduating from college, and with a new job, he borrows to buy a flashy new car. Furnishing the apartment and building a wardrobe is easy with store cards offering aggressive no-EMI-for-12-month deals. And when he trades his rental up to own a large single-family home, he signs up for a 30-year mortgage forever trapped into debt. Being married to a spouse who works helps, but divorce rates are upwards of 50 per cent, so when families split, it causes an enormous financial burden on both spouses.

The government struggles to educate citizens on the fact that debt can be good or bad. Investing in a meaningful education, a basic car, or an affordable primary home is essential, but spending beyond one’s means is unwise. But the average American is rarely concerned about the debt burden, and thinks only about the EMI, because the system is designed that way.

Automobile dealership ads show the monthly EMI offered rather than the purchase price of a vehicle. If a desired car’s EMI is too high, finance companies stand ready to extend the life of the loan to bring the EMI down. Two decades ago, 60-month auto loans were the longest term available. Today, 84-month loans are standard.

Personal financial experts implore Americans to set aside 5-10 per cent of their income to save for a rainy day and an additional 5-10 per cent for their retirement. But most don’t because the American system penalises savers with extremely low-interest rates and rewards borrowers with highly sophisticated loan products designed to consume more than necessary.

Then, there are also the bitter truths about the costs of living. In the big metropolitan cities of New York and San Francisco, there simply isn’t enough affordable housing. Owning a car is prohibitively expensive because of tolls, parking charges, and insurance. Millions of low-income people have to work multiple jobs simply to stay afloat. Saving a portion of their income is a luxury.

The massive injections of relief by Congress are intended to address the current pain. If Americans who were gainfully employed before the crisis can’t quickly get back to work, they can’t begin to resume making their debt payments, and the entire system can collapse, nudging the US into deflation in which supplies stay high but there’s not sufficient demand. That can get messy. Just ask Japan.

The writer is Managing Director, Rao Advisors LLC, Bedford, Texas